How to Have it All: LNG, a green economy and reconciliation

“To develop practical measures that help Canada meet or exceed our 2030 emissions targets on the way to a net zero future, and that strengthen an innovative economy, deepen shared prosperity and enhance national unity.”

• Energy Future Forum vision statement, Dec. 2019

The future of natural gas is a contentious issue in Canada. Depending on your perspective, it is either a fading industry, a vital transition fuel, or a long-term energy solution. How can Canada make the most of its High-ESG Natural Gas resources while addressing other important considerations, including climate change, energy security and Indigenous economic reconciliation? This paper examines this question through the lens of the four main stakeholders: the federal government, the provincial governments, First Nations and industry.

It is based on the consultations conducted by the Public Policy Forum’s Energy Future Forum, a platform for dialogue and collaboration on Canada’s energy transition. The paper aims to provide clarity and insight on the challenges and opportunities of liquefied natural gas (LNG) expansion in Canada. It also outlines the expectations and requirements of each stakeholder group and the potential areas of alignment and compromise.

Few Canadians have ever heard of the Montney basin, a geological formation that cuts through northern British Columbia and Alberta and is home to one of the world’s great motherlodes of relatively inexpensive natural gas – a third of the country’s total reserves and enough to supply all Canadian needs (residential and industrial) for the next 140 years. That’s more than ample to also relieve the energy security pressures on such Asian allies as Japan and Korea – and to lessen their reliance on purchases from Russia that directly or indirectly help finance Russia’s war on Ukraine. The natural gas reserves within the Western Canadian Sedimentary Basin, Montney being a major one, are some of the most prolific and economic natural gas sources in North America that can also enable countries such as China, India and Vietnam to address their emissions reduction targets by reducing their usage of coal.

Depending on one’s perspective, natural gas is either a) nearing the end of its useful life; b) is the indispensable transition fuel on the road to decarbonization; or c) can serve as an ongoing source of reliable, affordable and decarbonized energy. If one believes the first proposition, there is little need for discussion about what Canada should do with its gas gifts as investment will not materialize. If one allows that the latter two are possible, then the question arises as to what it would take to develop this resource in a manner consistent with other critical priorities, particularly fighting climate change.

Those who know the Montney formation and the significant number of other large and small deposits in that region will tell you that:

• They represent a boon to such rural communities as Fort St. John, Dawson Creek, Grande Prairie and many more municipal communities;
• Much of their bounty sits on or passes through Indigenous territory and will contribute to their economic sovereignty;
• They are the upstream enabler of both Canada’s largest-ever investment at LNG Canada and Cedar LNG as the first Indigenous-controlled LNG export facility, both in Kitimat;
• They have already helped alleviate pressure on Europe’s energy security via export routes through the U.S. Gulf Coast; and
• They produce one of the lowest-carbon natural gases in the world thanks to a combination of good geology (it comes out of the ground with lower carbon content than competing gas), good geography (the contours of the earth mean the journey for gas from B.C. to Asian markets is 10 days or half the time than from the United States and our northern climate makes the process of cooling natural gas for offshore sales into a liquid state easier) and good governance (Canada’s advanced methane emissions regulations and technologies provide a material carbon advantage and our ESG record is superior to that of competing supplies such as Qatar and Russia).

At a time when Canada is challenged by affordability concerns, current account deficits and weak foreign direct investment, the Montney and other formations within the Western Sedimentary Basin represent a great equalizer. As argued in PPF’s Leadership Blueprint for Canada’s High-ESG Gas, fully developing Canada’s gas is good for the economy, inclusive prosperity, Indigenous reconciliation and, perhaps counter-intuitively, global emissions. If this was a quarter-century ago, there would be no doubt the Montney motherlode would be developed to its maximum and widely celebrated in the manner of Quebec’s hydro, northern Ontario’s mines and Prairie agriculture. Instead, today’s attitudes are often ambivalent and polarized. For those who oppose the development of natural gas as a matter of principle, what to do about the Montney (and other gas deposits as far away as Newfoundland) is often a closed case. For those trying to weigh the costs and benefits within net-zero emissions goals, the question becomes: what would it take to satisfy various concerns and develop this energy treasure trove?

This paper sets out to address the challenge. It imagines a four-sided table seating the federal government, the provincial governments, Indigenous governments and the resource sector. We are asking each one, what requirements would enable you to support further development of the Montney, other neighbouring deposits and, by extension, the LNG industry? What do you have to see to grant your license? Can this become a win-win-win-win?

As things stand, Canada’s limited ability to get its natural gas liquified and onto foreign markets remains a serious obstacle to realizing our potential as a global player. This is despite the greenlighting of LNG Canada’s long-awaited Kitimat, B.C. LNG export terminal and the approval of the offshore B.C. Haisla-controlled Cedar LNG project. Approvals have also been conferred on Woodfibre LNG in Squamish, B.C., and for the second phase of LNG Canada, but these and other proposed plants still face considerable headwinds, including how to access clean energy, particularly electricity, to power their operations.

Foreign investors and purchasers are beating a path to Canada because our natural gas tends to be significantly lower in carbon intensity than competing global suppliers and our social and governance record is significantly better, including an enviable standing as a rule-of-law nation that does not hold resources ransom for geopolitical advantage. If Canada can satisfy reasonable internal requirements, LNG could become one of the country’s few “strategic tradables,” providing us with greater leverage in a world in which all countries are struggling for influence.

LNG also has the capacity to spur growth at home, providing fresh revenue streams for much-needed investments in such areas as health care, housing and education. Data provided to the Public Policy Forum shows that only a portion of Canada’s untapped LNG opportunities (30 millions of tonnes per annum, almost equivalent to the combined capacity of LNG Canada’s phase 1 and 2) in B.C. alone, has the potential to add roughly $7.4 billion annually to Canada’s economy over the next three decades and to raise national employment by an annual average of 65,000 jobs.

The way this growth is distributed also matters. Indigenous communities are the leading proponents of almost all projects under construction or consideration.

On the other side of the ledger, the world’s emissions from coal, the highest emitting fossil fuel, grew in 2022 by 1.6 percent – far greater than the last decade’s average growth rate. For context, to achieve the International Energy Agency’s Net Zero by 2050 Scenario, there is a pressing need for an 8 percent yearly reduction in emissions from coal-fired power plants – the primary consumers of coal. Switching coal for an average carbon-intensity gas reduces emissions by 50 percent when producing electricity and by 33 percent when providing heat. In this context, Canadian LNG, with 60-90 percent lower emission intensity than the global competitors, could play a crucial supporting role in achieving global climate targets.

Realistically, Canada has very few chances to take a material bite out of global emissions. Switching coal (or even gas from less favourable suppliers) for Canadian LNG presents one of those opportunities. That said, proving replacement on a molecule-by-molecule basis would be challenging. However, if Canadian LNG can keep demonstrating its life cycle emission advantage (as was recently demonstrated in Cedar LNG’s impact assessment), then Canadian LNG can convincingly establish itself to importing nations as a superior alternative to either coal or a higher-emission LNG. This approach would be consistent with the federal government’s guidance for best-in-class GHG emissions performance by oil and gas projects.

The Public Policy Forum is seeking to bring clarity to an area beset by policy fog: do we want to further develop our natural gas? What requirements need to be met by the quartet of interested parties (federal government, relevant provincial governments, First Nations and industry) to satisfy each other’s needs around proposed LNG expansion? Undertakings will have to flow in multiple directions, including what governments need from industry, what industry needs from governments, what First Nations need from both and what the others may need from Indigenous titleholders.

This paper marks the culmination of an initial consultation process through the PPF’s Energy Future Forum with representatives of these four corners of LNG development. It is intended to help stakeholders and decision-makers better define and understand trade-offs and their acceptability.

Canada is a member of multiple trade and security agreements. LNG development should contribute both to our security and prosperity at home and that of our allies, with particular attention to their own decarbonization efforts. The war in Ukraine has also accorded greater prominence to national security issues.

What governments need from the industry

1. Strategic weight: Applying the same argument used in The Canadian Critical Mineral Strategy, proponents should demonstrate that their product will be “essential to Canada’s economic security … or is a sustainable source of highly strategic commodity for our partners and allies.”
2. Reducing Dependence: LNG developments should contribute to Canada’s climate and security goals and support trading partners and allies. Exporting Canadian LNG to Japan and South Korea would lessen those countries’ dependence on Russian gas. Displacing Russian gas would diminish the Kremlin’s ability to finance its war on Ukraine, strengthening the overall security of Canada and its allies. A Canadian focus on Asia frees up U.S. supply in support of Europe and reduces price pressures that hurt the economies of lower-income nations such as Pakistan and Bangladesh.
3. Alignment with International Strategies: Proponents of LNG should be attentive to Canada’s international strategies and undertakings, such as the methane pledge and Canada’s Indo-Pacific Strategy. The latter commits us to “prioritizing the Indo-Pacific region as part of the Powering Past Coal Alliance, which is working to help partners advance their transition from unabated coal power generation to clean energy” and ensuring “Canada will collaborate with partners in the region to support a transition to cleaner energy.”

What the industry needs from governments

1. Taking Canada’s Domestic Successes Global: Canadian government policy should build on Ontario and Alberta’s successful transitions away from coal by making assistance to our partners in coal-to-gas switching an international relations priority. The government needs to take steps to ensure Canadian LNG remains competitive to dissuade countries such as China from turning even more to coal and high-GHG-emitting alternatives.
2. Article 6 of the Paris Agreement: The federal government will support the implementation of international and bi-lateral emissions trading arrangements under Article 6.2 and potentially 6.4 of the Paris Agreement (or similar but separate arrangements) to help effect a more efficient global energy transition and enable LNG projects – and the jurisdictions in which they reside – meet emissions reduction targets.

Proposed LNG facilities must demonstrate their commitment to environmental sustainability and emissions reduction. They also must show their preparedness for the energy system of the future in order to mitigate the risk and costs associated with stranded assets.

What the industry needs from governments

1. Electricity: Access to clean electricity supplies at competitive rates should be ensured by provincial governments and their agencies – with the support of federal government tax credits and other policies.
2. Nature-based solutions: Qualified facilities should be able to use verifiable and acceptable nature-based offsets in meeting federal and/or provincial compliance standards and emissions criteria. The standard for verifiability and acceptability of these offsets will be set by the federal/provincial government in consultation with stakeholders and rights holders.
3. Tax status: Qualified facilities should be treated by the federal and provincial governments as clean energy projects for the purposes of tax measures, green bonds, grants and other incentives and programs.

What governments need from the industry

1. Net Zero Emissions Commitment: Provided that the supporting measures from different levels of government are guaranteed (including access to clean electricity with competitive rates), facilities must present a credible and achievable plan to reach net- or near-zero emissions in accordance with a timeline aligned with federal and provincial targets. This can involve the application of Carbon Capture and Storage (CCS), emissions trading, nature-based solutions and offsets.
2. Displacement of High-Emission Fuels: The government has sought in the past to place the onus on Canadian exporters to prove that Canadian LNG will displace coal and/or more emissions-intensive LNG or other fossil fuels in importing nations. The question is what’s the standard of proof? “Balance of Probability” or “Beyond a Reasonable Doubt”? As PPF argued in the Leadership Blueprint for Canada’s High-ESG Gas, “ultimately it is the aggregate effect that packs the real punch”. Government encourages facilities to provide evidence that with a “Balance of Probability” approach, their product can be reasonably expected to reduce GHG emissions globally by displacing coal and/or more emissions-intensive LNG or other fossil fuels in importing nations – even if molecule-for-molecule traceability cannot be absolutely determined. This voluntary practice will be helpful for the proponents to advance industry-to-industry conversations for potential ITMO trading schemes under the Paris Agreement’s Article 6 with importers once government-to-government arrangements are in place to enable those mechanisms in the future.
3. Methane Emissions Performance: Aligned with Environment and Climate Change Canada’s approach in guidance for best-in-class GHG emissions performance by oil and gas projects, facilities must demonstrate superior environmental performance, both in terms of their methane emissions profile and measurement, monitoring reporting, and verification (MMRV) standards relative to their global competitors. To maintain global competitiveness, the standards adopted by the industry must be in compliance with the newest efforts aimed at the development of an internationally consistent MMRV framework. Facilities must show a credible plan for steady downward movement in methane emissions, at a minimum, keeping pace with Canada’s commitment under the Global Methane Pledge. This includes their upstream emissions as well (i.e., natural gas feed).
4. Regulatory Compliance: Facilities must be in compliance with federal and provincial environmental plans, First Nations’ criteria and other relevant environmental regulations. In order to deliver this, industry will need governments to speak with a more collaborative, harmonized and consistent voice that ensures the viability and consistency of compliance with the regulatory requirements.
5. Future Energy Pathways: Where applicable, facilities should provide a plan that incorporates pathways that constitute futureproofing (e.g., hydrogen) into their operations at a point in time at which it is economically and technologically viable.
6. CCS: Aligned with Canada’s Carbon Management Strategy, facilities will put forward plans, where relevant, to capture and either store or utilize emissions.
7. ESG Disclosure: In addition to their environmental case, facilities will need to show social and governance plans that are in keeping with the standards of an advanced democracy like Canada. They should disclose their environmental, social and governance (ESG) performance and sustainability metrics and indicators using internationally recognized standards and methodology and obtain their verification by appropriate third parties.

Canada is committed to the principles of reconciliation and the creation of opportunities for Indigenous investment, ownership and leadership and must be compliant with UNDRIP legislation.

What Indigenous communities need from the industry

1. Indigenous (co-)ownership: Facilities must enable Indigenous communities’ participation in every phase of the project development and operations, including, where desired, joint equity ownership. There are various enabling options and arrangements for co-ownership, such as free equity or loan guarantees. The best functioning arrangement and terms for each project must be negotiated with the interested communities.
2. Employment and capacity building: The industry needs to ensure the best available measures are in place to attract participation from Indigenous communities’ youth and workforce. This can be done through business contracting and targeted training programs that lead to job placement in the local projects, both in the construction phase and during the operation of the facility. These arrangements can be augmented by negotiating a minimum threshold for the percentage of local Indigenous employees for the facility.

What Indigenous communities need from governments

1. Approval processes: Where Indigenous communities are equity or economic partners with industry, they share the risks of lengthy approval processes. These processes must be streamlined, particularly when they contribute to global emissions reductions. As well, building on the experience of the Squamish Nation, First Nations jurisdiction should be respected in carrying out environmental assessments.
2. Indigenous Procurement: Aligned with the Procurement Strategy for Indigenous Business, the federal government supports Indigenous businesses with procurement opportunities as they relate to LNG projects to explore partnerships and joint ventures.
3. Access to capital: Indigenous participation in the project will be facilitated by the federal or provincial government’s support through loan guarantees or alternative arrangements to ensure appropriate access to capital. Discussions between governments and Indigenous communities should be launched on splitting royalties and tax revenues to ensure an equitable government-to-government distribution of economic benefits.
4. Regulatory certainty for the consultation phase: Federal and provincial regulatory bodies must identify a more transparent process that focuses on the communities that are directly impacted and are in the immediate proximity of a project. The level of consultation required should also be reflective of the type and intensity of the project’s potential impact. This can mitigate much of the uncertainty and risk associated with the consultation process for the proponent while potentially preventing conflicts between the Indigenous communities.
5. Modern Treaties: Where Modern Treaties exist, the risks associated with multiple unresolved and overlapping claims are mitigated, and Indigenous economic development is aided by the greater clarity modern treaties provide.

What industry needs from Indigenous communities

1. Clarifying Modern Treaties: Where Modern Treaties do not exist and overlapping claims are made, Indigenous communities should make an effort to clarify claims and counterclaims in order to mitigate business risks.
2. Stable Support: Communities need to set up stable and functioning entities that represent the rights holders and the impacted communities so they can engage with industry and government on their behalf to ensure durable and reliable Indigenous support – support that is conditional on industry and government meeting their needs and expectations.

LNG developments are expected to contribute to inclusive opportunities and shared prosperity for communities, provinces and the nation as a whole. Benefits must be widespread. The federal government recognizes the need for industry to remain competitive globally because companies have options to invest in international operations. That’s why it ensures practical and competitive industrial climate policies, which include sufficient export protections and jurisdictional consistency throughout the confederation.

What governments need from the industry

1. Employment: Facilities will be expected to contribute to job creation and training opportunities, particularly in local and Indigenous communities, in compliance with Labour Requirements (prevailing wage and apprenticeship requirements) as stipulated in the Budget 2023 Supplementary Information.
2. Government revenues: Facilities will be expected to generate public revenues to support the programs and services of governments.
3. Export earnings: Facilities will be expected to contribute positively to the country’s trade and current account balances.
4. Community Investment: Facilities must demonstrate their commitment to investing in the communities where they operate and leave a positive economic impact.

What the industry needs from governments

1. Regulatory streamlining: In keeping with an overall approach for projects deemed to contribute to global emissions reductions and in order to boost the competitiveness of projects and hit market windows in a timely manner, the provincial and federal governments should provide regulatory certainty and obligation on timelines for the LNG projects and their supply chain (e.g., the natural as feed and pipeline for transferring the feed). This includes the best available measures to expedite assessment and permitting processes and limit time spent in judicial review.
2. Policy coherence and consistency: Investments in decarbonization must be both substantial and long-term. It is essential that investors can count on a stable and supportive policy environment. The government needs to foster certainty so that Canadian LNG remains competitive internationally and mitigates the risk and obstacles to GHG abatement investments.
3. Contracts for difference: The industry requires fiscal certainty on government programs in order to execute long-term investments, especially given policy uncertainty around carbon pricing. Government should insure against sudden and detrimental policy changes through measures such as Contracts for Difference.